Oil prices jumped on Monday as a huge wildfire in Canada’s oil sand region knocked out over a million barrels in daily production capacity, contributing to a significant tightening of markets over the past weeks.
The lost capacity is equivalent to well over a third of the country’s typical daily production, with almost all of Canada’s crude from oil sands exported to the United States.
U.S. crude futures jumped 84 cents or 1.9 percent to $45.50 per barrel by 0707 GMT, rising for a fourth session in a row.
International Brent crude rose 62 cents, or 1.4 percent, to $45.99 a barrel.
“The fires have caused pipeline shutdowns … several producers in the area have evacuated all but the most essential employees,” energy brokerage Poten and Partners said in a letter to clients, although it added that “inventory levels (both in Canada and the U.S.) will provide a cushion for some time.”
Canadian officials on Sunday showed some optimism about the fire as favorable weather helped fire fighters, driving the flames away from the oil sands town Fort McMurray, but there was no timeline for a restart of operations at evacuated sites.
“The market is close to balanced… when we consider the large amount of supply offline in Canada and elsewhere, which could last for months,” Morgan Stanley said.
U.S. shale oil output is in decline and production is also falling in Latin America, Asia, and Nigeria, eroding a 1-2 million barrels per day supply overhang that pulled down oil prices by 70 percent between 2014 and early 2016.
Barclays said that 1.25 million barrels of daily production were currently affected in Canada, and that globally some 2.2 million barrels of daily output were currently offline.
NEW SAUDI ENERGY LEADER
Markets were also watching Saudi Arabia, the world’s biggest oil exporter, where a government shake-up over the weekend included the appointment of Khalid al-Falih as head of the new Ministry of Energy, Industry and Mineral Resources.
Oil policy was previously under the Petroleum Ministry led by veteran minister Ali al-Naimi.
“We are committed to meeting … hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity,” Khalid al-Falih said on Sunday.
Since 2014, Saudi Arabia has led the Organization of the Petroleum Exporting Countries (OPEC) through a strategy of defending market share rather than reducing production to support prices.
“Changes in Saudi Arabia oil leadership only underscore the shift in strategy to one focused on market share over price,” Morgan Stanley said.
RBC Capital Markets said that the move “does not represent a shift in the Kingdom’s current oil policy.”